The Supreme Court issued an opinion recently on the Alice Corporation Pty. Ltd. v. CLS Bank International case that declared claims that are drawn to a patent-ineligible abstract idea are not eligible under Section 101. The court has left room for software patents to validated, but patents that take an abstract idea and provide a computer to implement it are invalidated.

In case, the Supreme Court held that the claims of Alice Corp.’s patents for mitigating settlement risk were drawn to an abstract idea of intermediated settlement, and that requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention under section 101 of the Patent Act. In finding Alice Corp.’s patent invalid, the Court affirmed a Federal Circuit judgment during a term where Federal Circuit decisions had been unanimously reversed with regularity.

It all started back in 2007, when CLS Bank filed a declaratory judgment action against Alice Corporation Pty. Ltd. in the U.S. District Court for the District of Columbia, seeking a declaration of noninfringement, invalidity and unenforceability of Patent Nos. 5,970,470, 6,912,510, and 7,149,720. The claims related to computerized methods for reducing risk in future events. The methods are intended to reduce risk through the exchange of obligations between parties using data processing systems or in conjunction with computer media reading code to direct the exchange of obligations.

The court granted summary judgment of invalidity under 35 U.S.C. § 101 on the basis that both the system and method claims are not directed to patent-eligible subject matter because they claim an abstract idea. On appeal, a divided panel of the Federal Circuit initially overturned the district court’s ruling. Then the Federal Circuit granted rehearing en banc and vacated the panel decision, affirming the district court’s decision in an opinion. With the Federal Circuit’s decision generating seven opinions from the panel, the decision reflected discord within the Federal Circuit and generated no majority opinion that clarified the legal standard for determining patent eligibility under 35 U.S.C. § 101. On December 6, 2013, the Court granted certiorari, and on March 31, 2014, oral arguments were held.

On June 19, 2014 in its unanimous decision, the Supreme Court affirmed the Federal Circuit’s holding that the claims are invalid because they were directed to patent-ineligible subject matter. The Supreme Court reiterated its two-part test set forth in Mayo Collaborative Servs. v. Prometheus Labs. First, courts must determine whether the claims at issue are directed to a patent-ineligible concept. Second, courts must consider whether the elements of each claim transform the nature of the claim into a patentable application.

I recently sat down with Jacob Baron, partner in Holland & Knight’s Intellectual Property practice group, to discuss why the court left room for software patents to be validates, but patents that take an abstract idea are invalidated.

“The Supreme Court has long held that ‘laws of nature, natural phenomena and abstract ideas’ are not patentable. Courts have found it difficult to find a workable test that separates unpatentable abstract ideas from patentable inventions that apply abstract ideas,” he explained. “The prior test adopted by the Federal Circuit was not well suited for evaluating software inventions and as a result the patentability of software came into question.”

According to Baron, in Alice, the Supreme Court provides a framework for determining patentability for Information Age inventions, like software inventions. The prior test adopted by the Federal Circuit as the sole test for patentability, the "machine or transformation" test, was developed for Industrial Age inventions that were grounded in physical or more tangible forms.

“In Bilski v. Kappos, the Supreme Court ruled that the "machine or transformation" test is not the sole test for determining patentability. However, the Supreme Court did not provide further guidance and it did not provide a new test. Now, with the Alice decision, the Supreme Court has finally provided a framework for evaluating inventions from the Information Age,” he continued.

So, what exactly are the implications of the court’s opinion on the IP and software industries?

Well, the Court issued a narrow ruling that clarified its test for patentability described in the recent Mayo decision relating to the patentability of biological processes. The first step in the test, according to Baron, is to determine whether the claims are directed to a law of nature, natural phenomena or an abstract idea. If so, the second step is to determine whether the claim describes an “inventive step.” And, software inventions that include an "inventive step" are patentable. Therefore, computerized processes that use a computer to implement an abstract idea are not patentable.

Baron explained, “This should be seen as a positive for the software industry because it allows companies to protect their intellectual property investments in truly inventive Information Age technology while providing courts with a framework to weed out weak patents that simply add a computer to well-known processes from the financial and business world.”